Help With Human Resources Outsourcing

More companies are turning to third-party providers for HR services; tech managers need to pay special attention to privacy and security concerns.

Outsourcing still generates a lot of interest--and the hottest area right now is providing support for companies' human-resources functions. Last week, Delta Air Lines Inc. and Marriott International Inc. each signed seven-year deals to hand off their HR responsibilities to third-party service providers. Delta's deal with Affiliated Computer Services Inc. is worth $120 million; Marriott didn't disclose financial terms of its deal with Hewitt Associates. Earlier this month, in one of the biggest HR-outsourcing deals to date, British Telecom signed a 10-year, $575 million expansion of its HR-outsourcing contract with Accenture. The agreement covers a broad range of services for BT's 87,000 employees and 180,000 pensioners.

The main reason for the increasing interest in handing off personnel-support services is simple: cost savings. In a study released earlier this month, Yankee Group says big companies can cut their HR-administration costs by as much as 20% through a well-managed outsourcing deal. Delta says it expects to reduce HR and payroll costs by more than 25% over the life of its deal with ACS.

There are several factors to consider when weighing whether to farm out HR responsibilities: whether to work with a single service provider or multiple best-in-class firms; how to manage the privacy and security implications, especially to reassure employees when they find out personal data is moving off the premises and possibly offshore; and how easily a service provider can handle growth, particularly acquisitions and geographic expansions. The increase in human-resources outsourcing also means more business-technology executives must take on the role of internal consultant, as their employers construct complex deals with service providers in which technology plays a central role in workforce management.

Increasingly, service providers market themselves as one-stop shops. ACS will handle a broad range of functions for Delta, including compensation and benefits administration, payroll, call-center, and information services. For Marriott, Hewitt will provide benefits administration, compensation, recruiting, and learning and development services for more than 133,000 Marriott employees worldwide.

While the business case for HR outsourcing is strong, analysts say the industry's growth could be slowed if vendors can't guarantee employee privacy--particularly when personal data is moved offshore. U.S. laws such as the Health Insurance Portability and Accountability Act don't prohibit moving employee medical records offshore, but that could change if a vendor suffers a major privacy breach, says Yankee Group analyst Philip Fersht. Last year, California Gov. Arnold Schwarzenegger vetoed legislation that would have restricted movement of state residents' medical data offshore. The European Union's E-Privacy Directive already limits the movement of personal data outside the EU.

IT has a strong role in crafting HR-outsourcing deals, UPS's Sheridan says. Photo by James Leynse

IT executives at companies with longstanding HR-outsourcing arrangements say they need to play a consulting role to ensure that their companies get access to secure, state-of-the-art technology at competitive prices. "IT has a very strong role to play" in crafting and overseeing HR-outsourcing deals, says Don Sheridan, VP of IS at United Parcel Service Inc. UPS farms out a range of HR functions to several third parties, including Hewitt, CitiStreet, and Mellon Financial. Among other things, a team of UPS's IT-security specialists reviews the systems used by outsourcers to ensure that employee data isn't compromised, Sheridan says.

To help ensure that its arrangement with Accenture wouldn't compromise employee privacy or security, British Telecom created teams that included IT personnel with security expertise, says Andrew Lewcock, procurement manager. "There are large numbers of people within BT who have the skills to assess our provider's networks and systems, and we certainly took advantage of that," he says. BT's IT staff also will work with Accenture to deploy and manage PeopleSoft 8.8.

Companies also are turning to HR-services providers to help with growth. Defense contractor Northrop Grumman has grown through acquisitions, and it has conducted a separate benefits-enrollment program for incoming employees. This year, for the first time, Northrop Grumman will hold companywide enrollment for all of its 125,000 employees to simplify the process. "It's going to be a challenging project," says Dennis Wootan, corporate director for benefits administration.

Wootan will get help from a new partner with access to a network featuring military-grade security and scalability. Towers Perrin, Northrop Grumman's HR-services provider, is forming a joint-venture company with EDS to provide more complete HR-outsourcing offerings. As a result, Northrop Grumman's HR data will be handled by EDS's global secure network.

Paul McDougall is a former editor for InformationWeek. View Full Bio